A lot happened ten years ago. We’d just voted Barack Obama into the White House. Billy Mays was here and alive and selling us Hercules Hooks. Shorty had freshly acquired them apple bottom jeans comma boots with the fur. Kitty and I had just entered our senior year of college (holy fuck we’re old).

We were sweet baby angels who did exactly what we were told: get good grades, stay out of trouble, pursue a career where you have both passion and talent. We pushed ourselves to work part-time, take on industry internships, still achieve academically. We’d done it. Our futures felt secure and blindingly bright, like Southern California teeth.

And then the walls came tumbling down.

Much ink has been spilled over the 2008 stock market crash and subsequent economic recession. So you’ll pardon me if I add to the deluge. But my purpose here, ten years after the fateful events that ripped the world economy asunder, is to give a millennial’s eye view of the thing.

Below is my attempt to understand and explain the 2008 crash and recession in a way I couldn’t have ten years ago.

We were seniors in college. I think it’s fair to say we had no idea what was going on at the time, what it meant for our future, and why it all was happening. We didn’t understand why the world our parents, teachers, guidance counselors had promised us just… no longer existed.

We graduated into a situation no one—least of all the class of 2009—was prepared for.

Guys. We were so fucked.

Dramatis Personae

Quick primer on how the stock market and United States economy work, for our babies who grew up in a post-recession world (we’re soold).

“The Fed” refers to the Federal Reserve. It’s the central bank of the United States, and it does four things:

Makes sure financial institutions are safe and sound and monitors how they affect the whole system.

Protects and supervises consumers by analyzing economic developments and administering laws and regulations.

A stock is a tiny piece of a company that you can own. If you invest in stocks, it means you own pieces of companies. By investing in these companies’ stocks, you earn interest when the company makes money.

The stock market refers to the system through which we buy and sell stocks. A lot of the action in the stock market takes place in the New York Stock Exchange on Wall Street. It’s actually multiple stock market indices, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite among others.

The stock market rises and falls by points, which are equal to one dollar. So when we say the stock market “fell by 50 points,” we mean that all the stocks in that particular stock market index are now selling for $50 less than they were.

Credit rating agencies like Moody’s and Standard & Poor’s (S&P) assess the credit worthiness of corporate or government loans and give it a score (AAA, for example). Investors then use the score to determine how likely it is the debt will be paid. A good score means the loan is a good investment for the financial institution.

The economyexpands and contracts according to factors like the gross domestic product (GDP), employment, and interest rates as determined by the Fed. An expansion is when everything is going super well for the economy! A contraction is when productivity declines, business revenues go down, and companies lay off workers. Unemployment rises so consumers spend less money.

What EXACTLY happened?

On September 29, 2008, the Dow Jones Industrial Average dropped by 777.68 points. At the time, it was the largest stock market point drop in human history. And while “the 2008 crash” itself generally refers to this single event, it was several years of shittiness and several more months of gut-punches in the making.

The subprime mortgage crisis

For the years leading up to the 2008 crash, banks were handing out mortgages like candy to anyone who wanted them. “Wow! How generous!” you might be thinking, “Banks sure are nice to give even the most financially insolvent Americans a chance to own a home!”

Except that these subprime mortgages, as they were called, were incredibly risky, both for the banks and for the homeowners. There’s a reason it’s hard these days to get a loan if you have bad credit and a low income: it’s because those factors indicate you are not able to repay your debt.

Financial institutions bundled up the subprime mortgages with more reliable debt, and the credit rating agencies slapped a really good rating on the whole package. So investors bought the whole kit and kaboodle, including the subprime mortgages, under the false impression that it was a solid investment. Spoiler alert: it was not a solid investment.

Oh, and those mortgages the banks were handing out to anyone with a pulse? They came with variable interest. Which means the home buyers might be paying 2% interest on their mortgage one year… and 20% interest the next. Which, for people who might not have been able to afford a mortgage in the first place, is a swift ticket to foreclosure.

RIP Lehman Brothers

Shady investments in subprime mortgages were basically the fuse that traveled to the dynamite of giant banks taking unreasonable risks.

When I say “unreasonable risks” I mean that the banks were over-leveraged. Here’s an example of how leverage works: if you have an income of $100,000 and a mortgage of $300,000, you’re leveraged 3 to 1.

These financial institutions essentially had very little capital (liquid money they could move around) and a staggering number of liabilities in the form of these debt bundles. Which… they… called assets??? For some reason??? Owning someone’s debt is all well and good for collecting interest, but it doesn’t really benefit you if the borrower can’t actually pay it off.

Lehman’s shitty risk management policies means they were one of the most over-leveraged and worst hit by the subprime mortgage crisis. And when they collapsed, they took down their investors with them, both corporations and individuals.

It was dramatic af: employees of Lehman Brothers were literally given a moment’s notice to vacate the building.

Bank bail-outs

These titanic banks were so ridiculously over-leveraged that their collapse would have been disastrous for the whole world. People would have suffered even more than they did if something wasn’t done to save them.

Just after Lehman Brothers went down, a bill was put before Congress to have the Fed lend money to the banks so they could weather the storm. Congress turned down the bill. Lehman Brothers was toast. When the reality of just how toasty they were became apparent, Congress reconsidered the bill.

“Too big to fail” is one of the most frustrating terms in economic history. Because it doesn’t mean “Failure literally cannot occur because this financial institution is so large and therefore stable.” It means “This bank is so large that if they were to fail—even because of their own shitty decisions—it would be fucking disastrous for the rest of us so we cannot allow that to happen.”

Which is basically the situation the Fed was facing with the subprime mortgage crisis, the stock market going down in flames, and banks being over-leveraged. So the Fed bailed out the banks. The government gave the banks money to cushion their loans, at staggeringly generous interest rates—money that came from the tax payers.

But things were better after the bailout! Right? Everything went immediately back to normal! Right? … Right?

In the end, the economy contracted by 0.3 percent by October, 2008. 240,000 jobs were lost that month alone. This officially meant the country was in a recession that would last for the next four years.

Who’s to blame?

Much finger-pointing has gone on in the wake of the Recession. Here are some of the common scapegoats.

The banks

What the everloving hell were they doing handing out subprime mortgages like Oprah with free cars? Why were they leveraging themselves so drastically? Why didn’t they see that compelling S&P to bury a bunch of subprime mortgages in a pile of reliable loans would eventually end in disaster?

Was it pure greed? Selfishness? Were they all blinded by the high of success? After all, it’s easy to take risks—even really, really big risks—when everything has been going your way for a decade.

But then, the first thing I ever learned about the stock market is that it fluctuates. What goes up must come down. Stock market booms, housing bubbles… make hay while the sun is out, yes, but don’t set the fucking barn on fire behind you!

The government

If those motherfuckers in Congress hadn’t waited a month to pass the bailout bill, maybe the recession never would’ve happened. Or maybe it wouldn’t have been so bad.

But to be completely fair, it’s easy to see why they didn’t want to bail out the banks. After all, the banks were careless and greedy enough to get themselves into that mess, so why the hell should the rest of us get them out of it?

The Federal Reserve

Then there’s the Fed. It is literally their job to regulate and monitor things so that shit like recessions never happen. WHERE WERE YOU GUYS ON THIS ONE? YOU HAD ONE JOB. ONE EXTREMELY COMPLEX, IMPORTANT, DIFFICULT JOB. BUT STILL.

Consumers

Irresponsible lending is one thing. But consumers didn’t have to take the loans.

Except, in the words of Professor Mark Blyth of Brown University, “When you have wage stagnation for the majority of Americans for almost, if not, in some cases, more than a generation, how do you fill in the gap? People load up on credit on the expectation they’ll pay it off with higher wages but they don’t have the higher wages; they just have a ton of debt. So when they become unemployed, they become insolvent like the banks and they drag each other down.”

Consumers were desperately trying to get ahead. They trusted the mortgage lenders, trusted S&P, trusted real estate agents not to steer them down a destructive path. How were they to know their trust was badly misplaced?

It’s easy for me to sit here, a decade later, and judge people for accepting variable interest rate mortgages they couldn’t reasonably afford in the middle of a housing bubble. But if the system had worked as it should, most of those people would never have been eligible for such self-destructive banking in the first place.

The 2008 crash and recession was due to a fucking Jenga tower of precarious situations that compounded on each other until it all came toppling down. So if you’re looking to place blame, look no further than the entire global economy. Which, y’know, is all of us.

The aftermath

They say the stock market recovered in 2013. But for the average citizen, the damage had been done.

During the months after the 2008 crash, millions of people lost their jobs. Incomes fell. The value of assets like homes and stock investments fell. People lost money they’d been saving for decades. Consumers stopped buying things, companies went out of business, and nobody was hiring.

The effects of the 2008 crash and recession are real. While researching this piece I kept thinking that the problem just looked like a bunch of fluctuating numbers floating around in the ether. Stocks, points, interest rates—they’re all just imaginary concepts wielded by people who have nothing to do with me.

Economics is devastatingly personal. The decisions made on Wall Street and Capitol Hill affect our intimate lives in ways both seen and unseen every day. And if that doesn’t frighten you, then you’ve got ‘nads of solid granite.

35 thoughts to “A Brief History of the 2008 Crash and Recession: We Were All So Fucked”

Honestly, it was hard to understand what was happening even as an adult who was old enough to be directly affected by it all. But I bet it was terrifying to be a child and not understand the fear and uncertainty around you. 🙁

One thing you don’t mention (and another reason to blame the government) is for the repeal of the Glass-Steagall Act. It was was a reform passed after the Great Depression that prevented banks from mixing their consumer and investment arms, protecting consumer money. It was repealed by Clinton in the 90s and would have prevented people from being at risk of losing their accounts even the assets went banks went under. In the aftermath of the Great Recession, they included a version of this in Dodd-Frank (the Volcker Rule) but it was made essentially toothless by Republicans recently.

Dagnabbit you’re right. I think we need to do a followup on the various banking regulatory acts and how they’re meant to protect consumers. Perhaps it can go under “Reasons why you really need to vote and pay attention to Congress.”

I would add the movie “The Big Short” to your list of resources. Obviously fictionalized, but a really entertaining (and hopefully a little informative) watch. And the great Anthony Bourdain made a cameo.

The Big Short the book is way better than the movie. Also, the common narrative was that it was low income homeowners that caused the crash. A study reviewing defaults found it was middle class homeowners taking out multiple mortgages to purchase investment properties that started the downfall when interest rates started to rise. It was not sub-prime mortgages: http://fortune.com/2015/06/17/subprime-mortgage-recession/

Great post. The 2008 financial crisis was a colossal mess. In my opinion, it has led to the lost decade for the low income. As the wealth gap continues to grow in America, the low-income today are no better off than they were 10 years ago. As the stock market bull has raged, wage growth has been stagnant. I love this quote that you used from, Professor Mark Blyth, “When you have wage stagnation for the majority of Americans for almost, if not, in some cases, more than a generation, how do you fill in the gap? You load up on credit. BAM! This is something that no one is talking about.

One extremely unfortunate side effect for graduates who were unable to find a job was that many went back to school. They often ended up racking up more debt, adding to the student loan crisis. Ultimately, it led to people being over-educated for entry-level positions and still unable to find a job. A big mess, indeed.

Hey so I’m new here, but is this the general tone of the site? Like sarcastic/hyperbolic for effect? I can’t take any of this article seriously because the links you post don’t even validate the statements you’re making.

“The elderly went begging.”

That AARP report says nothing about this.

“None of it will fix things for retirees who suddenly found themselves with nothing after a lifetime of careful investing.”

From that linked article:
“Through September, the percentage loss for the year in average account balances among 401(k) participants was between 7.2 and 11.2 percent”. So…where did “found themselves with NOTHING” come from? Also it says, “Employees between the ages of 56 and 65 who had the fewest years on the job were the least affected, while those 36 to 45 years old with the longest tenures suffered the steepest declines.” So retirees weren’t hardest hit, but people with 20-30 more years of time left in their careers to recover.

I know I’m being critical so you can just write this off, but I really don’t get if you’re trying to educate or just be funny/edgy? It pains me to think someone might read this and think they actually learned something.

Yep, you caught us! We often use hyperbole, sarcasm, and poop jokes to get our point across. It’s not for everybody. I’m glad you were able to click on the links provided to get the specific data you were looking for. In the future I’ll try to be less hyperbolic to avoid confusion. Thanks for visiting!

I work at a nursing home in MO and a majority of the people here have been affected by 2008. I have elderly that have been out begging on street corners. I have family members who have financially abused their elders due to 2008. I have elderly that have lost their homes that they have had for 20 to 30 years. It is terrible! Just because it does not happen in your circle, does not mean it does not happen. Great post!

I just think that our parents gave the best advice that they did in the time we were growing up, that advice back in the day made sense back then. I don’t want to be harsh on our parents because they did the best they could with the advice that made sense. It’s up to us as adults to get new information and “parent” ourselves, and apply new information to our lives.

This is true. I don’t think anybody gives bad advice intentionally. Such a person would be a sociopath.

The thing that makes me crazy about it is that many Boomer parents came from Greatest grandparents who survived incredible financial and social turmoil. (The Great Depression, wartime rationing and drafts, the Spanish Flu, etc.) And I know *their* parents gave them those insights. I think a pretty relentlessly bull market just sorta drowned it out. My mentor, a Boomer, was terrible at saving money, but her own mother survived the Holocaust, and could never break the habit of stashing food away for as long as she lived. That kind of generational disconnect is really, really hard for me to wrap my head around!

First of all, the crash was absolutely predictable. I had been reading articles for months in the Wall Street Journal about all of the variable interest loans that were set to reset to higher rates after the teaser rates expired. I was short thrifts and oil refineries in 2008 and as a result actually made a little money that year. The next few years were fantastic as the markets came back off the lows, providing big gains for those who stayed in the markets, especially if you bought more.

The second thing to understand is that a lot of these borrowers weren’t really people buying homes. They were speculators buying several houses with little or no money down using what were called “no doc ” or ” liars loans ” since they didn’t need to provide proof of their income. They knew full well the terms of the loans, which in some cases didn’t even require a large enough payment to pay for interest accumulation each month, meaning the value of the loans was increasing each month! The borrowers knew that the loans would reset to higher rates, but they just figured they could refinance into another loan when the first one came due, taking out equity when they did so since the house would be worth 25 or 50% more than they paid. This worked great until there were no more loans available, at which point the borrowers defaulted.

Because the price of houses was increasing so fast, fueled by all of this credit, people were taking equity out of their homes left and right and spending it on things. This both left people more vulnerable and created a fake economy. The economy didn’t crash, it never existed in the first place! A lot of the services those jobs were providing were paid for with borrowed money. No one was working and making the money needed to buy those services, so it was all a stack of cards. I had trouble feeling too sorry for folks who racked up a big debt living large and then just walked away from the mortgage because they now owed more than the home value since thwy took out all ofvthe equity and spent it, even though many could have continued to pay on the loan.

Finally, you missed Collateralized Debt Obligations (CDOs). These were insurance contracts one large bank would write to another saying that they would cover losses in the mortgage securities beyond a certain point. The big banks and brokerage houses like Lehman and Merrill Lynch thought that they were covered for losses, but the trouble was that the banks created these insurance policies out of thin air and sold them to each other. In the end, the insurers all had big losses on the mortgage securities themselves, so no one could pay the insurance payments out. If they had checked they may have found bank A owed Bank B who owed Bank C who owed Bank A, so no one actually owed anything. The taxpayer through the TARP program was happy to bail them out, so they gladly took the money. I personally would have liked to see the Fed cover the money market customers and let the bank fail so they’d be out of jobs now. New banks would have quickly sprung up in their place.

the credit rating agencies never get mentioned in all of this. moody’s, s+p, and fitch fucked up ratings on all those CDO bundles. it’s because they don’t get the smartest finance people and just rubber stamp the shit and collect their checks while wishing they were making mad jack at goldman sachs.

don’t forget that orange man at countrywide financial. he walked away rich after peddling all that sub-prime poop. i kept my job in that time, thankfully.

Thank you for this very thorough blog post that was very instructive. I was in 12th grade in ’07/’08 and basically my whole time in university was quite dark as employment prospects weren’t so high (even getting – unpaid – internships was hard).
I’m watching “inside job” and it makes extremely sad and now part IV : accountability just makes me want to puke (and makes me lose my faith in humanity).